Legal Definitions - defeasance clause

A defeasance clause is a specific provision included in a mortgage agreement. It states that the conditional transfer of property ownership to the lender (the mortgagee) becomes null and void once the borrower (the mortgagor) has fully repaid the mortgage loan according to the agreed terms. Essentially, this clause guarantees that the borrower will regain clear, unencumbered title to their property upon successfully fulfilling all their loan obligations.

Here are some examples to illustrate how a defeasance clause works:

• Example 1: Standard Home Purchase

  A couple, Sarah and Tom, purchase their first home and take out a 30-year mortgage. The mortgage document they sign includes a defeasance clause. For three decades, they diligently make their monthly payments. When they make their very last payment, the defeasance clause is triggered. This means the lender's conditional claim or interest in their property is automatically extinguished, and Sarah and Tom now own their home outright, free and clear of that specific mortgage lien.

• Example 2: Commercial Property Loan

  A small business owner, Maria, secures a loan to buy a new warehouse for her expanding company, using the warehouse itself as collateral for the loan. The mortgage agreement for this commercial property explicitly contains a defeasance clause. If Maria successfully repays the entire business loan over its term, the defeasance clause ensures that the lender no longer has any legal claim or interest in the warehouse, and full, unencumbered ownership reverts solely to Maria's company.

• Example 3: Mortgage Refinancing

  David decides to refinance his existing home mortgage to get a lower interest rate. When he closes on the new loan, the funds from the new lender are used to pay off his original mortgage in full. The original mortgage contained a defeasance clause. Upon the full repayment of the first loan, this clause becomes active, legally removing the first lender's lien on David's property. A new mortgage with a new defeasance clause is then established with the second lender, ensuring that when David pays off *that* loan, his property will again be free of any lender claims.